Tuesday, October 7, 2014
Maryland State Senator and American University Washington College of Law professor Jamie B. Raskin recently wrote an opinion piece for the Washington Post, A shareholder solution to ‘Citizens United’. In the piece, he explains that
Supreme Court Justice Anthony M. Kennedy’s majority opinion in Citizens United essentially invites a shareholder solution. The premise of the decision was that government cannot block corporate political spending because a corporation is simply an association of citizens with free-speech rights, “an association that has taken on the corporate form,” as Kennedy put it. But if that is true, it follows that corporate managers should not spend citizen-shareholders’ money on political campaigns without their consent.
Senator Raskin further notes that the Congress doesn't appear interested in moving forward with the Disclose Act, and the Securities and Exchange Commission has not pursued requiring campaign spending disclosures. In response, the senator has a proposal:
Our best hope for change is with the state governments that regulate corporate entities throughout the year and receive regular filings from them. I am introducing legislation in January that will require managers of Maryland-registered corporations who wish to engage in political spending for their shareholders to post all political expenditures on company Web sites within 48 hours and confirm that any political spending fairly reflects the explicit preference of shareholders owning a majority interest in the company.
Further, if no “majority will” of the shareholders can form to spend money for political candidates — because most shares are owned by institutions forbidden to participate in partisan campaigns — then the corporation will be prohibited from using its resources on political campaigns.
Back in early 2010, as a guest blogger here, I wrote a post, Citizens United: States, where I noted my reaction to the case, which was that I wondered how states would react and that the case made the issue "an internal governance issue, which is a state-level issue." (Please click below to read more.)
After Citizens United, the 22 states that had corporate spending bans either changed their laws or nullified them through other avenues. Several states moved to require varying levels of disclosures, from mandating board-approved expenditures to requiring ads to disclose top donors. Sheepish Admission: since 2010, I have been planning to write an article about all of this, but given that more than four years have passed, a blog post will have to suffice.
Anyway, I still believe that this issue is one for shareholders and that Citizens United, at its core, created an internal affairs question. I agree with Senator Raskin that the case permits political expenditures, that warrants some response. As I wrote initially, I still think
the case fundamentally changed the relationship between shareholders and the company. That is, to the extent Citizens United changed corporations’ ability to use corporate funds in a political manner, corporations now have a power (at least arguably) not contemplated by their charters. (It was not really necessary to consider as part of the corporate charter because such expenditures were generally viewed as not permitted.)
That said, I don't see the need to go as far as Senator Raskin's proposal. I support a state-level legislative fix that is much narrower and that (in my view) preserves the relationship between the shareholder and the corporation. My proposal: change state law to require every corporation to choose whether the entity will engage in political spending. Thus, the requirement would fall into the articles of incorporation for new companies and would compel a modification of the articles of incorporation for existing companies.
As an example, Maryland requires, among other things, that the articles of incorporation must include: "(3) The purposes for which the corporation is formed or a statement that the corporation may engage in any lawful business or other activity[.]" Maryland Corps. & Ass'ns Code § 2-104(a). To this, I would add:
(9) A statement explaining whether the corporation will engage in political spending, and if so,
(a) a statement explaining who has the power to authorize such expenditures (e.g., the Board of Directors, an authorized agent of the Board of Directors); and
(b) a statement of any limitations of such spending and powers.
(c) This requirement applies to new and existing corporations. Existing corporations must file an amendment to the charter in accordance with §§ 2-603 or 2-604 of this title.
I would also add to a provision to § 2-602, subpart b, the power to amend the charter to add or revoke the power of political spending set forth in the articles.
That's it. I would leave any additional disclosures to the discretion of the board of directors, with shareholders retaining the same powers they already had to request additional disclosures as they may desire.
For me, the point is to bring the contractual relationship between shareholder and the entity in conformity with the meeting of the minds at formation or stock purchase. As a general matter, it was expected that political spending by the corporation, at least at the federal level, was not an option, so most corporations were not formed with any expectation of such spending. Thus, shareholders did not have a chance to weigh in on the issue, and there was no disclosure of what might happen, so late comers could not choose to opt for other alternatives if politics were a concern.
Even before Citizens United, several states did not ban corporate independent expenditures or have other limitations, such as required disclosure of independent expenditures, bans or limits on electioneering communications, or disclosure on ads. Even in those states, though, spending on federal political issues was not permitted, and was thus not up for negotiation when a shareholder opted to purchase a corporation's stock.
Ultimately, political speech is significant enough that it warrants disclosure of the corporation's intent to speak in such a forum. If there had never been state or federal corporate limits on speech, it's likely that at least some shareholders would have resisted the activity. And, if not, the market would have spoken. By forcing each corporation to, at least once, put the issue to a vote of the shareholders, this proposal would give that market a chance to work.
My guess is that most shareholders would vote to give power to the board to decide if and when to give to political campaigns, but perhaps not. My main issue is that I don't like the idea that corporations have a new and influential avenue available to spend corporate money that was not contemplated by shareholders. Shareholders tend to be rationally apathetic, but they still have a right to know about the specific kinds of spending toward which they are being apathetic.
Make each entity say their intentions. It forces an important conversation that, without other restrictions, I think would have happened a long time ago.